Jupiter Emerging and Asian Markets: A guide

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Exploring changing investment markets in Emerging, Asian and Japanese economies

These articles are for informational purposes only and is not investment advice. Market and exchange rate movements can cause the value of an investment to fall as well as rise, and you may get back less than originally invested. The views expressed are those of the Fund Manager at the time of writing, are not necessarily those of Jupiter as a whole and may be subject to change. This is particularly true during periods of rapidly changing market circumstances. Every effort is made to ensure the accuracy of any information provided but no assurances or warranties are given. This document contains information based on the MSCI EM and the USA Indices. Neither MSCI nor any other party involved in or related to compiling, computing or creating the MSCI data makes any express or implied warranties or representations with respect to such data (or the results to be obtained by the use thereof), and all such parties hereby expressly disclaim all warranties of originality, accuracy, completeness, merchantability or fitness for a particular purpose with respect to any of such data. Without limiting any of the foregoing, in no event shall MSCI, any of its affiliates or any third party involved in or related to compiling, computing or creating the data have any liability for any direct, indirect, special, punitive, consequential or any other damages (including lost profits) even if notified of the possibility of such damages. No further distribution or dissemination of the MSCI data is permitted without MSCI’s express written consent. Jupiter Unit Trust Managers Limited (JUTM) and Jupiter Asset Management Limited (JAM), registered address: The Zig Zag Building, 70 Victoria Street, London, SW1E 6SQ are authorised and regulated by the Financial Conduct Authority.

Yet investors continue to group together emerging economies or Asian markets as a single investment class; benchmarked against a wide-ranging index that hides the unique opportunities available. This is a sentiment that is echoed in terms of fund flows, which are dominated by surges based on wider macro swings, rather than the underlying fundamentals that drive long-term performance. Unsurprisingly, after sell-off cycles are complete, individual economies in emerging markets and Asia have found themselves in a stronger position than before. Is it time to approach investing in sectors such as emerging markets, emerging market debt, and Asia with a new and more focused approach? Indeed, the evolution of this region over the past two decades has resulted in many countries today competing on a par with ‘developed’ world markets. Even in the more complex world of emerging market debt, the universe has matured as investors seek better sources of return. Such is the sector’s growth, this asset class has finally begun to be compared favourably to developed market counterparts, with the spread between EMD and US Treasuries at its widest since 2016. Meanwhile, the range of structural shifts being seen in developed Asian economies over the past five years should also be forcing investors to view it in a new light. Take corporate profits in Japan, which have risen to record levels after 60 years of oscillating at a 2%-4% range. Rising dividends in Asia have also doubled over the past two decades, and growth in some Asian economies is now yielding similar figures to the UK. The growth of these markets over the past decade exemplifies the need for investors to approach each economy individually and strategically, and is explored in further detail in this magazine by fund managers from Jupiter Asset Management investing in a range of assets across these economies. Taking a more detailed and analytical approach to unearthing the unique opportunities available, the fund managers reveal how they have been successful in avoiding benchmark biases and herd investing in their search for returns.

Emerging and Asian markets: A guide

The evolving investment universe of emerging, Asian and Japanese markets has seen them defy generalization over the past two decades. Today these investments are a staple holding in many a diversified portfolio.

Important information

The number of leading companies within emerging regions such as Asia is growing, potentially leaving behind the need for a distinction between ‘emerging’ and ‘developed’ markets in this area of the universe

Merging economies:

“Today, there are companies in Asia that we can quite comfortably admit are the best in the world at what they do”

Australia Hong Kong Singapore Taiwan South Korea China Malaysia New Zealand

JUPITER ASIAN INCOME GEOGRAPHICAL ALLOCATIONS

more sophisticated technological developments. Traditionally, investing in emerging markets has been perceived to carry much higher risks than developed stock markets and the two asset classes still occupy separate ‘buckets’ in most investors’ asset allocation processes. It may be time to rethink these rigid definitions however. Within the region, for example, Asia is home to a particularly high number of countries that can comfortably compete with developed economies in terms of the quality of their companies. In emerging markets too we have seen a profound change that is bringing it closer to developed market peers. Changing sector composition Emerging markets are often perceived as relying heavily on commodities and one worry for investors is that they will gain unwanted exposure to Brent crude by buying into an emerging market equities fund. But the shift that has been taking place in the composition of the investment universe means equity exposure in emerging markets can now provide investors with access to the same sectors as they would expect to see in a developed country index. Ross Teverson, Fund Manager of the Jupiter Global Emerging Markets Fund, says: “The whole emerging markets region has changed quite a bit [over the past 20 years], but one of the key changes has been that their dependence on commodities has reduced…I would describe that as a more diversified and more sustainable picture in emerging markets today.” An emerging markets equity benchmark today has a higher weighting towards such sectors as technology, healthcare and consumer services, while commodity-related names are far less prevalent. The MSCI EM Index is currently composed of 27% IT companies, 23% financials and 9% consumer discretionary stocks. In comparison, the MSCI USA also has some of the highest weightings in information technology (27%), financials (13%) and consumer discretionary (13%), while financial stocks make up 19% of the MSCI Europe Index. By definition, an emerging market is expected to lag behind on technological innovation, a theme which is more pertinent to investment now than ever before. Yet today, we see companies such as China’s Tencent or Baidu standing on equal footing with the likes of Facebook and Google in the US. “Technology is an exciting space for us, particularly technology-enabler companies,” says Teverson. “These are companies that are key to some of the big technological changes we see taking place: the rise of social media, the increased consumption of digital content, artificial intelligence or electric vehicles. “We have holdings in Taiwan, for example, one of which is an electronics testing equipment manufacturer. The equipment the company makes is used to test everything from electric vehicle batteries to the facial recognition chips that go into a lot of smart phones.”

Developed Asia Whilst the whole region has developed over those 30 years, the evolution of emerging economies in Asia means many are today competing particularly strongly with the traditional ‘developed’ world. For example, there are today more world leaders among Asian companies than ever before, while traditionally this would have been seen as a space reserved for developed market businesses. This is particularly the case for a number of large-cap stocks, which are today leaders in their field in a similar vein to many developed markets. Jason Pidcock, Head of Strategy for Asian Income, explains: “Today, there are companies in Asia that we can quite comfortably admit are the best in the world at what they do. For example, there are lots of companies in North Asia in particular, where even if they are only operating in one country like China, they are very large, very liquid and very investible.” Liquidity is another area where the region has seen huge improvements, with the rise in the number of large-cap companies making it easier to keep liquidity levels high. “A lot of people say ‘biggest doesn’t mean best’. I disagree,” says Pidcock. “My view is that actually biggest often does mean best, particularly when you are looking at private sector companies.” The rise of dividends Asia has also seen a strong rise in stocks paying out dividends over the past decade. For many investors, emerging markets is not an area of investment that has been traditionally associated with income. Yet the investible universe for Asian income alone has doubled over the past few decades, and whilst in 2001, the number of MSCI constituents with a payout ratio above the average of 40% was 160, by the end of 2017 there were over 300, according to Teverson. Such is the region’s growth in dividend payouts, income investors can expect to see similar yields from investing in Asian stock markets as they can in the UK. Pidcock says: “Dividends in Asia have seen a huge pick up since the mid-1990s and early 2000s. From 1995 to 2001 we saw a big pick-up in the average payout ratio too, which since 2001 has been fairly stable at about 40% (ex-Japan). “What has changed since 2001 however, is the number of companies with a payout ratio of that order or higher. That is because new companies have come to the market. There are a lot more telecoms stocks now than there were in the mid-1990s; there are more technology companies; REITs have entered the universe. “This diversity available today allows investors to have a very broad portfolio of income-yielding companies across lots of different sectors in Asia, just like the UK.”

Source: Jupiter Asset Management. As at 31.10.2018

Has the ‘emerging versus developed markets’ argument fallen out of fashion?

merging markets are generally considered to be economies with lower income or GDP per capita, levels of industrialisation, general standards of living and technological infrastructure than developed countries. However, over the last two decades the region has undergone a profound change, with large parts of the emerging market universe displaying developed market characteristics, such as higher standards of living, greater consumer spending power and

Jason Pidcock

26.2% 21.3% 16.1% 13.0% 9.2% 8.9% 1.5% 9.2%

Developed Asia For Pidcock, the ‘merging’ of emerging and developed economies in Asia is something which particularly holds true due to the fact the Asia Pacific region is particularly diverse in terms of the level of development of its country constituents, with some economies now providing lower risk characteristics than the traditional developed world. For the Jupiter Asian Income portfolio, this means holding large proportions in countries including Singapore, Taiwan, Hong Kong and Australia. All four countries have lower 10-year government bond yields than the US, which is a key indicator that the stock markets and currencies of these countries are less vulnerable to shocks. “Australia for example, is a rapidly growing developed market. Its GDP growth compared to developed world countries has remained steady and it hasn’t experienced a recession now for over 26 years,” Pidcock says. “The population has been growing for the last ten years, and much of that is from skilled immigration or people buying their way in.” While Australia is widely considered a developed market within the Asia Pacific region, Pidcock believes more and more countries such as Taiwan and Korea also deserve the ‘developed’ label and are heading that way. He says: “Countries like Taiwan and Korea have emerged to quite a great degree and the companies that we are investing in are certainly developed world companies. They are leaders in what they do and they can compete with any company in their sector from anywhere in the world.”

Important information

**Source: World Bank Global Findex

The rising penetration of financial products and services will forge dramatic change in developing regions of the world, driven by technological innovation and strong demographic characteristics. Jupiter’s Ross Teverson analyses the best way to access these long-term trends in emerging markets

Delivering positive change through rising financial inclusion

According to Teverson, financial business models should benefit from prevailing, long term global trends such as the transition from cash to digital payments, increasing mobile payments and rising financial inclusion. The opportunity is all the more ripe given the fact that in countries such as Brazil, which is one of the largest emerging economies, these trends are still in nascent stages. Only 32% of Brazilians over the age of 15 had a credit card in 2015 vs 60% in the UK. Cash still accounts for nearly half (48% of all consumer payments while the UK the figure is much lower (27%).* Teverson’s process on the Jupiter Global Emerging Markets Fund begins from a bottom-up, fundamental prospective, seeking companies where change is underappreciated by the market. This process aims to generate long-term capital appreciation by investing in under-researched and underappreciated companies, says Teverson. “We believe there are many well-managed companies throughout the developing world which could benefit from the theme of financial inclusion. Over the past year, stocks exposed to this theme have added value to our portfolio and we continue to have conviction in their upside potential.” Below he highlights key portfolio holdings leading the way in terms of financial inclusion.

Nearly half of the world’s working-age population (approximately 1.7 billion people) do not have access to a bank account. The disparity is even greater for women, where globally only 65% of women have an account compared with 72% of men. The gap has remained unchanged since 2011. Moreover, low banking penetration is almost exclusively a developing world problem; with nearly half of the world’s ‘unbanked’ population living in just seven countries: China, India, Pakistan, Indonesia, Nigeria, Mexico and Bangladesh. This may not be the case for much longer, however. Rapidly developing technology is creating opportunities for emerging economies to leapfrog their developed counterparts, in many cases bypassing physical accounts altogether and going straight for mobile-based systems. This is just one of the reasons why financial inclusion, and indeed the broader formalisation of many emerging market economies, is a key theme delivering positive change for Ross Teverson, Head of Strategy, Emerging Markets, and manager of the Jupiter Global Emerging Markets Fund. He explains: “Gradually increasing penetration of financial products, combined with remarkable demographics, should create a backdrop that, for well-placed financial institutions operating throughout the developing world, should prove conducive to strong and sustained earnings growth for a long time to come. "Across emerging and frontier markets, we see a number of attractive long-term investment opportunities stemming from rising financial inclusion, as well as improved infrastructure, communications and technology.”

n much of the world, financial inclusion – the process of individuals gaining access to basic financial products and services in order to meet their needs – plays a key role in reducing poverty levels and boosting prosperity. Such is its importance, the World Bank notes that since 2010 more than 55 countries have made commitments to financial inclusion, and more than 60 have either launched or are developing a national strategy. However, there is still a long way to go.

Rapidly developing technology is creating opportunities for emerging economies to leapfrog their developed counterparts when it comes to banking

*Source: PagSeguro Preliminary Prospectus. January 9, 2018.

Teverson believes Itau Unibanco is well-placed to benefit from financial development in Latin America. The firm, since listing in 1993, has already demonstrated that it is sustainable through downcycles while being highly profitable throughout most periods. Moreover, the banks growth profile is supported by the continued weakness of state banks and a balance sheet which can support further medium-term growth without risk of equity dilution. Teverson explains: “At a corporate level, the Brazilian bank is becoming progressively more conservative, in so far that it has successfully shifted to a more conservative loan mix – both on the corporate (shifting away from SMEs) and individual (higher-rated loans) sides. Itau has achieved this while also growing its ROE to more than 24% in the last two quarters and there is room for greater positive long-term structural change from consolidation.

Brazil: Itau Unibanco

Financial inclusion extends beyond simple access to a bank account and encompasses more complex financial instruments. Two such examples are pensions and insurance. Both sectors are extremely underpenetrated in Turkey. Only 20% of employees have a workplace pension, but the Turkish government is aiming to improve this statistic. The state is incentivising savings with a 25% top-up and, as a result, the market is growing rapidly, at a 20% compound annual growth rate from a low base. AvivaSA, a pensions and insurance joint venture between UK insurer Aviva and Turkish conglomerate Sabanci, is at the convergence of this structural shift toward financial security. Teverson explains his interest in the stock: “We believe the potential for the company to sustain high growth rates is underappreciated by the market. Additionally, the government has recently implemented auto-enrolment for pensions, as seen in the UK, which is still in the early stages. “The move gives us more certainty and visibility surrounding the growth prospects of this sector. Given current participation rates it is easy to see how auto enrolment could cause assets under management to increase significantly from a very low base. The government has a strong incentive to increase savings rates to solve Turkey’s economic Achilles heel: the persistent current account deficit and dependence on external savings.”

Turkey: AvivaSA

According to the Findex, mobile money accounts are particularly widespread in Kenya, where 73% of adults have one, as well as in Uganda and Zimbabwe, where about 50% do. In fact, all 10 countries where mobile account ownership is greater than financial institution account ownership are in Sub-Saharan Africa.** Kenya Commercial Bank (KCB) has been a core holding in Teverson’s portfolio for two years, with the proliferation of M-Pesa, a mobile-based money transfer and financing platform the main driving force behind financial penetration in Kenya and much of Sub-Saharan Africa. Launched in 2007, the platform is now the most successful mobile financial service in the developing world. KCB leverages this burgeoning technology by offering loan and savings accounts with attractive fees and variable payment or savings periods.“KCB, along with the rest of the Kenyan banking sector, derated in 2016 to the lowest price-to-book multiples seen for over 10 years on the back of a new law to cap interest rates,” explains Teverson. “In our view, KCB is relatively insulated from the impact of interest rate caps, as its strong retail deposit franchise means that it can maintain high margins by taking in current account deposits and then lending to larger, higher quality, corporate borrowers.” This resilience is evidenced by the fact that KCB has continued to generate a return on equity of around 20% and delivered 19% earnings growth over the past 12 months. Despite this strong operating performance, the stock remains attractively valued, having only partially recovered from the derating seen in 2016, adds Teverson. “We believe that today’s valuation level of 1.4x price-book and a 6% dividend yield look compelling, particularly considering how well positioned KCB is to benefit from ongoing positive industry and structural change.”

Kenya: Kenya Commercial Bank

Jupiter Global Emerging Markets Fund: The fund invests in emerging markets which carry increased volatility and liquidity risks. The fund invests in smaller companies, which can be less liquid than investments in larger companies and can have fewer resources than larger companies to cope with unexpected adverse events. As such price fluctuations may have a greater impact on the fund. This fund invests mainly in shares and it is likely to experience fluctuations in price which are larger than funds that invest only in bonds and/or cash. *The Key Investor Information Document, Supplementary Information Document and Scheme Particulars are available from Jupiter on request. Holding examples are for illustrative purposes only and are not a recommendation to buy or sell.

Important information

Hear from Jupiter fund managers about how emerging markets have evolved over the past decade

“What we have seen since 2007 is that corporates have outpaced sovereign issuance”

Emerging Market Debt assets have grown to a staggering $22trn as the universe has continued to mature and investors seek new sources of return outside of developed markets according to Jupiter’s Alejandro Arevalo

‘The rise of EMD means it is no longer seen as a niche asset class’

EMD in a global context Interestingly, the asset class has also begun to be compared favourably against its developed market counterparts. Following the correction seen in emerging markets this year, the spread between EMD and US treasuries is the widest it has been since 2016, from the tights of 250 bps at the beginning of the year to 377bps as of September 2018. Meanwhile, the spread differential between EM Corporate HY and is US counterpart has widened by close to 200 bps. At the same time, while the US dollar is currently perceived to be highly overvalued, according to a recent Bank of America Merrill Lynch Global Fund Manager survey emerging market currencies have never been so undervalued, with a net 51% of respondents believing this to be the case. For Arevalo, the stronger dollar is only a short-term risk for companies and investors should instead focus on the region’s strong growth, which has resulted in looking attractive compared to the US: “Remember that in the US, 70% of growth comes from consumers,” he says. “And where there is an environment of higher interest rates, investors are starting to see the consumer get hurt. That is not really sustainable for the engine of growth to continue in the US.” As the asset class continues to mature, Arevalo expects to see more corporates issuing bonds in local currency as the saving pools continue to grow in EM we are seeing the need of pension funds, sovereign wealth funds and Insurance companies to invest their money locally and avoid the risks of foreign currency fluctuations. He also expects the diversity of the local market to increase over time as corporate issuance continues to grow, bringing with it a more diverse investor base, including more institutional investors. “As the asset class continues to develop, investors will see emerging markets as a key part of a very well-diversified portfolio,” he says.

issued substantial amounts of Eurobonds in US dollars over the last decade.* As such, the emerging market fixed income universe is today a mainstream asset class that can no longer be ignored by asset allocators. Recent investment flows continue to reflect this fact: total net assets in Europe-domiciled emerging market fixed income funds have increased from an estimated €7.7bn in 2007 to €255.7bn in September 2018, according to Morningstar. Alejandro Arevalo, Fund Manager of Jupiter’s Global Emerging Markets Corporate Bond and Global Emerging Markets Short Duration Bond funds, explains that as a global investor today, it is very difficult to avoid emerging markets. He says: “If you look at Purchasing Power Parity (PPP), 60% of global GDP comes from emerging markets today. And that is 10% higher than it was ten years ago.”*

*Source: IMF paper “ Recent Developments on Local Currency Bond Markets in Emerging Economies” As at June 11, 2018.

Market correction Yet with the asset class suffering a correction this year, fuelled by heightened risk aversion as a result of a number of market events – most notably in Turkey and Argentina, where macro concerns led to currency devaluations - investor caution towards emerging market debt (EMD )has returned. However, Arevalo has approached the sell-off in the asset class seen in recent months in a different way, stating it is “good news” for long-term investors in the asset class. The reaction of the market to the sell-off in emerging market fixed income has been indiscriminate, he says particularly as fundamentals in the emerging market region are far from uniform. While Turkey and Argentina struggle to place inflation under wraps, other countries such as Indonesia and India are accelerating their rates of reform in an effort to stabilise their economies. “[The sell-off] is just part of a normal cycle in emerging markets,” says Arevalo. “In many of these sell-off cycles, the asset class often comes out stronger than before as governments push through reforms at much quicker pace to avoid being one of those countries penalized by investors by standing still. For example, take a look at the market five years following the famous taper tantrum of 2013. There was a sharp correction in emerging market asset prices, yet today the asset class has recovered and in many respects is much stronger now. I believe this time round, once again, the region will come out much stronger again.”

More importantly, when it comes to fixed income, Arevalo also believes the correction has also helped to sift out “tourist” investors from EMD, resulting in a “cleaner” asset class and a shift to the asset class’ core fundamentals. He explains: “When you see investors selling across the board, and in many respects following the herd, that is when it is a good opportunity for us to find value. This chase for yield during the last couple of years squeezed a lot of value out of emerging markets but now we are starting to see it once again.”

“As the asset class continues to develop, investors will see emerging markets as a key part of a very well-diversified portfolio”

**Source: JP Morgan & Bond Radar

decade ago, emerging market debt was considered a somewhat adventurous choice for an investment portfolio, and the risks associated with investing in the asset class were not as well understood as they are today. The small size of the asset class made it a niche investment proposition. Yet during the last five years, total outstanding debt (local and USD) has more than doubled in size to $22trn as of the middle of 2018 and many emerging economies have issued

Jupiter Global Emerging Markets Corporate Bond: The fund invests in emerging markets which carry increased volatility and liquidity risks. It invests primarily in bonds which have a low or no credit rating including high yield and distressed bonds. These bonds may offer a higher income but carry a greater risk of default, particularly in volatile markets. Monthly income payments will fluctuate. The fund uses derivatives, which may increase volatility. Investment in financial derivative instruments can introduce leverage risks which can amplify gains or losses in the fund. Counterparty risk may cause losses to the Fund. In difficult market conditions, it may be harder for the manager to sell assets at the quoted price, which could have a negative impact on performance. In extreme market conditions, the fund’s ability to meet redemption requests on demand may be affected. Some share classes charge all of their expenses to capital, which can reduce the potential for capital growth*. Jupiter Global Emerging Markets Short Duration Bond: The fund invests in emerging markets which carry increased volatility and liquidity risks. It may invest in bonds which have a low or no credit rating including high yield and distressed bonds. These bonds may offer a higher income but carry a greater risk of default, particularly in volatile markets. Monthly income payments will fluctuate. In difficult market conditions, it may be harder for the manager to sell assets at the quoted price, which could have a negative impact on performance. In extreme market conditions, the fund’s ability to meet redemption requests on demand may be affected. Some share classes charge all of their expenses to capital, which can reduce the potential for capital growth*. *The Key Investor Information Document and Prospectus are available from Jupiter on request. These funds can invest more than 35% of their value in securities issued or guaranteed by an EEA state.

Important information

Hear Jupiter fund managers explore the risks involved with emerging market investment

Key opportunities Much of this value can be currently found in corporate debt – an area that has undergone a tremendous transformation over the past 15 years and now outpaces sovereign debt both in performance and issuance. Arevalo, who has an overweight allocation to corporate issues in his funds, says: “One of the key reasons for this is to do with the development of ratings. Even after the re-rating that we have seen over the last three years, the corporate index is still rated as investment grade, while sovereign debt is high yield. That means we have more options to position ourselves in investment grade names without taking on undue risk.” This is important as Arevalo believes it is a misconception to think of corporate EMD as being less liquid than the sovereign market. US dollar corporate issuance has consistently outpaced Sovereign over the last 10 years with total a outstanding universe of USD2.1trn, double the size of that of sovereigns as of September 2018.

Within his universe, Arevalo has seen on average between 80 and 100 emerging market companies enter the bond market each year, with a total annual issuance of around $483bn last year – a far cry from an illiquid market.** The overall debt issuance from the Asia Pacific region, excluding Japan, has increased in value by almost 50% since 2012, and in H1 2017 was the second largest globally after North America, according to a Clearstream-commissioned study produced by Aite Group (‘The Future of Global Debt Issuance: 2025 Outlook’). “What we have seen since 2007 is that corporates have outpaced sovereign issuance,” Arevalo says. “The reason for this is that many sovereigns don’t want to issue as much dollar debt because they are conscious of a crisis and mismatches between assets and liabilities. They are effectively trying to keep their budgets in balance.”

Jupiter Funds Overview

*Credit ratings are calculated using asset ratings from different ratings agencies.

Jupiter Global Emerging Markets Fund

Fund launch date: 07.03.2017 Fund currency: US$ Benchmark: JP Morgan CEMBI Broad Diversified Overview: The Jupiter Global Emerging Markets Corporate Bond Fund aims to achieve long-term income and capital growth through investments in fixed interest securities of issuers exposed directly or indirectly to emerging market economies worldwide. The fund is managed by Alejandro Arevalo, who is also a fund manager in the wider Jupiter fixed income team. When selecting investments for the portfolio, the starting point is to form a view on the global economy in order to determine how much risk it is appropriate to take. From there, he will select the countries and sectors he thinks are likely to offer attractive opportunities. This involves taking a view of matters such as global monetary policy, the outlook for inflation, interest rates and economic growth. Close attention is also paid to balance sheet of individual companies to see what long-term opportunities may be available.

Jupiter Global Emerging Markets Corporate Bond (SICAV)

Fund launch date: 01.11.2010 Benchmark: MSCI Emerging Markets Overview: The Jupiter Global Emerging Markets Fund aims to achieve long-term capital growth by investing primarily in companies listed or exposed to emerging markets worldwide. Fund Manager Ross Teverson seeks out companies in emerging markets globally where he sees a change– be it on a company, industry, or structural level – but that remain underappreciated by the stock market. He and his team establish a rounded assessment of the identified changes by visiting companies on the ground, as well as corroborating their views with those of the company’s suppliers, clients and competitors. To ensure the fund benefits from the widest range of potential investment opportunities, Teverson disregards the traditional Emerging Market indices. He is comfortable looking beyond the usual larger companies of the indices, and also looks at medium-sized and smaller companies for their potentially more attractive growth prospects.

*L= >$10bn, M= $10bn-$2bn, S= <$2bn.

*L= >$5bn, M= $5bn-$1bn, S= <$1bn.

Fund launch date: 15.09.2005 Benchmark: TSE Topix Overview: The objective of this fund is to achieve long-term capital and income growth by investing primarily in Japanese equities. Managed by Dan Carter, who is supported by Mitesh Patel, the fund’s portfolio is a fairly concentrated selection of typically 40-50 shares. The cornerstone of the team’s investment approach is the fundamental principle that shares are valued according to their potential for future payments to shareholders. The team therefore seek to compile a portfolio of investments in companies which they believe have the ability to grow their distributions to shareholders more rapidly than the market as a whole. In seeking to achieve that aim, the team focuses on the ability of a company to increase its payments to shareholders over time. Another consideration is the willingness of management either to pay payments to investors, or to allocate capital appropriately so as to maximise shareholder returns. Finally they consider whether the probability of superior payments is being correctly reflected by the market in the company’s share price.

Jupiter Japan Income Fund

*L= >$10bn, M= $10bn-$2bn, S= <$2bn. **Financials includes the fund’s exposure to Real Estate (17.15%).

Fund launch date: 02.03.2016 Benchmark: FTSE AW Asia Pacific ex-Japan Overview: The fund aims to generate income and capital growth over the long term. It invests primarily in equities and similar securities of companies listed or located in the Asia Pacific region, including Australia and New Zealand, but excluding Japan. Jason Pidcock, the fund manager, aims to make use of his long experience of income investing by bringing together a portfolio of his best investment ideas from across the Asia ex Japan region. The fund will typically hold shares in 40-50 companies from across the region, including both developed and developing markets.The strategy aims to provide investors with an income, although this is variable and not guaranteed. Jason also has the flexibility to invest in some companies which have a below-average yield if he also believes they may enhance the capital growth potential of the fund.

Jupiter Asian Income Fund

Top Ten holdings

Market Cap*

Geographical Allocation

Large 35.4%

Small 46.4%

Medium 17.2%

Asset Allocation (% of Net Assets)

Credit rating*

Top Ten holdings

Market Cap*

Top Ten holdings

Market Cap*

Sector Allocation

Large 69.9%

Medium 29.2%

Large 66.9%

Medium 23.9%

Small 6.7%

Corporate Bond 85.9%

Government Bond 5.8%

Cash 8.3%

Jupiter Asian Income Fund: The fund invests a significant portion of the portfolio in emerging markets, which carry increased liquidity and volatility risks. This fund invests mainly in shares and it is likely to experience fluctuations in price which are larger than funds that invest only in bonds and/or cash. Quarterly income payments will fluctuate. All of the fund’s expenses are charged to capital, which can reduce the potential for capital growth*. Jupiter Global Emerging Markets Fund: The fund invests in emerging markets which carry increased volatility and liquidity risks. The fund invests in smaller companies, which can be less liquid than investments in larger companies and can have fewer resources than larger companies to cope with unexpected adverse events. As such price fluctuations may have a greater impact on the fund. This fund invests mainly in shares and it is likely to experience fluctuations in price which are larger than funds that invest only in bonds and/or cash*. Jupiter Japan Income Fund: All of the fund’s expenses are charged to capital, which can reduce the potential for capital growth*. Fund: All of the fund’s expenses are charged to capital, which can reduce the potential for capital growth*. *The Key Investor Information Document, Supplementary Information Document and Scheme Particulars are available from Jupiter on request. Jupiter Global Emerging Markets Corporate Bond: The fund invests in emerging markets which carry increased volatility and liquidity risks. It invests primarily in bonds which have a low or no credit rating including high yield and distressed bonds. These bonds may offer a higher income but carry a greater risk of default, particularly in volatile markets. Monthly income payments will fluctuate. The fund uses derivatives, which may increase volatility. Investment in financial derivative instruments can introduce leverage risks which can amplify gains or losses in the fund. Counterparty risk may cause losses to the Fund. In difficult market conditions, it may be harder for the manager to sell assets at the quoted price, which could have a negative impact on performance. In extreme market conditions, the fund’s ability to meet redemption requests on demand may be affected. Some share classes charge all of their expenses to capital, which can reduce the potential for capital growth**. Jupiter Global Emerging Markets Short Duration Bond: The fund invests in emerging markets which carry increased volatility and liquidity risks. It may invest in bonds which have a low or no credit rating including high yield and distressed bonds. These bonds may offer a higher income but carry a greater risk of default, particularly in volatile markets. Monthly income payments will fluctuate. In difficult market conditions, it may be harder for the manager to sell assets at the quoted price, which could have a negative impact on performance. In extreme market conditions, the fund’s ability to meet redemption requests on demand may be affected. Some share classes charge all of their expenses to capital, which can reduce the potential for capital growth**. **The Key Investor Information Document and Prospectus are available from Jupiter on request. These funds can invest more than 35% of their value in securities issued or guaranteed by an EEA state. This article is for informational purposes only and is not investment advice. Market and exchange rate movements can cause the value of an investment to fall as well as rise, and you may get back less than originally invested. The views expressed are those of the Fund Manager at the time of writing, are not necessarily those of Jupiter as a whole and may be subject to change. This is particularly true during periods of rapidly changing market circumstances. Every effort is made to ensure the accuracy of any information provided but no assurances or warranties are given. Jupiter Unit Trust Managers Limited (JUTM) and Jupiter Asset Management Limited (JAM), registered address: The Zig Zag Building, 70 Victoria Street, London, SW1E 6SQ are authorised and regulated by the Financial Conduct Authority.

Important information

Holding examples are for illustrative purposes only and are not a recommendation to buy or sell. Source: Jupiter Asset Management 30.11.18

Japanese corporate profits have risen to record levels in recent years. Dan Carter, Fund Manager, examines how Japanese companies are reacting to the situation, and what the implications are for Japanese equity investors.

Looking at the bigger picture in Japan

That is why we think it is crucial for us to step back, look at any common threads that run through our research, analyse the corroborating evidence and observe what themes are emerging. One of these common threads is the way in which Japanese companies are reacting to their historically high level of profits Unprecedented profitability Until recently, the pre-tax profits of Japanese companies had oscillated within a range of around 2%-4% for about 60 years. There was understandably a trough in profit margins at the time of the global financial crisis, but the ensuing recovery has apparently resulted in a breaking of the usual cycle, as margins rose back up to 4% but kept climbing, hitting 6% recently. It has been an unprecedented move. This dramatic shift in profitability has been due to several factors, but one of the more significant ones has been the moderation of labour expenses: when measured as a percentage of GDP, labour costs for Japanese companies have been falling since the early 1990s. Japan’s corporate sector has traditionally been smart about cutting costs when times are tough, especially when the yen has been strong. A profitability boom on this scale is something they haven’t encountered before, however, so we have been fascinated to see how they are responding. From our recent research it is clear that, for many companies, the answer is that record profits provide the opportunity to accept the higher up-front costs required to grow their businesses.

he last couple of months have been especially busy ones for us, including a packed schedule on a research trip to Japan and many meetings with Japanese companies in London. We are bottom-up investors, and such peaks in our research activity can generate an almost overwhelming quantity of company-specific information, but we also recognise the value of perspective and seeing the bigger picture.

*Source: Bloomberg: Financial year end 2018

“This dramatic shift in profitability has been due to several factors, but one of the more significant ones has been the moderation of labour expenses”

Investing for long-term earnings For example, En-Japan1, the operator of one of Japan’s leading mid-career change sites, grew its sales and operating profits by 28% and 40% respectively last year but predicts that this year operating profit will grow by just 11% on 19% top-line growth. Although they are renowned as being conservative forecasters of their own earnings, this presumed margin squeeze is at least in part due to the additional costs of personnel and advertising, which the company has voluntarily taken to facilitate future growth. A similar story was present in our meeting with niche semiconductor maker Rohm*. Last year the company’s profits exploded 79% on an 11% pick-up in sales, whilst this year just 2% operating profit growth is expected on a 6% improvement in the top line. Once again, these may be low-ball forecasts, but they also include the higher operating costs associated with the company’s capacity expansion.

Hear more about the income prospects of investing in Asia and Japan from Jupiter’s Dan Carter and Jason Pidcock

Rounding out this observation is Prestige International* the operator of value-added call centres. Here the company posted growth of 12% in both sales and operating profits last year, an all-time high, and is forecasting a further 11% operating profit expansion this year whilst sales are expected to grow more slowly. Growing margins this year are a function of rising utilisation of facilities built in recent periods and illustrates the kind of harvest phase that En-Japan and Rohm will all be expecting. The point of this observation is two-fold. Firstly, for asset allocators concerned about seemingly disappointing official company profit forecasts it is evidence that some of these profits are being voluntarily foregone to lay the foundations for future growth. Secondly, for ourselves and other stock pickers it is an indication that, as Japanese corporate belts get loosened, the dispersion between the future winners and losers will likely grow. Companies investing these bumper profits wisely will be in an excellent position to continue prospering, while those who rest on their laurels or make unwise investments risk floundering in years to come. This is a reminder to us that we must continue to be vigilant when considering where to invest our clients’ capital and to which companies to allocate the most patience. The influx of corporate intelligence gathered on our excursions to Japan, when married with a good dose of perspective, remains crucial in developing our thinking on emerging risk and opportunities in the market.